Medicare and Health Savings Account (HSA): What You Should Know

Published on September 11, 2023 .

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A Health Savings Account (HSA) can be beneficial for lowering taxable income while saving pre-tax money for out-of-pocket medical expenses. HSA funds are tax-deferred, and withdrawals are tax-free. However, when facing Medicare enrollment, excess contributions may be penalized. Learn who qualifies for an HSA and how to avoid taxes and penalties on your hard-earned savings.

An HSA (Health Savings Account) is a tax-advantaged account to help cover eligible medical expenses.
Only individuals with high deductible health plans (HDHPs) can have an HSA.
The money in your HSA can go toward Medicare premiums, deductibles, and copayments, as well as dental, hearing, and vision care.
Stop funding your HSA six months before Medicare enrollment to avoid a tax penalty.

What is an HSA account?

An HSA (Health Savings Account) is a tax-exempt trust or custodial account you or your employer can establish to pay for or reimburse qualifying healthcare costs. During your working years, you or your employer can contribute to an HSA with pre-tax dollars.

To be eligible to set up and contribute to an HSA, an individual must:

Be covered under a high deductible health plan (HDHP).
Have no other health insurance.
Not be claimed as a dependent on someone else’s tax return.

An HSA works much like a 401k or 403(b) account. Your contributions can reduce taxable income for the year. You won’t pay taxes on withdrawals as long as you use the HSA funds for qualified medical expenses.

Can you move or combine HSA accounts?

You can move your account from the provider your employer uses, even if you no longer work for the company. You can also roll over, combine, or hold multiple HSA accounts with different providers.

Is there a time limit on HSA reimbursements?

HSAs do not have a time limit on reimbursements. Taxpayers can defer repayments of healthcare costs for years if they choose. This allows the contributions to an HSA to accumulate tax-free until you reach age 65.

Can I make HSA contributions when on Medicare?

Once you enroll in Medicare, neither you nor your employer can contribute to your HSA. Doing so can result in a 6% excise tax penalty on your contributions.

If you have creditable coverage, which offers at least as much coverage as Original Medicare, you can continue funding your HSA without penalty. With this coverage, you can delay enrolling in Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage).

A current or former employer or trade union may carry health plans with creditable coverage. Other organizations with such policies include:

Individual or group health insurance
Your or your spouse’s COBRA plan
Medicaid
Federal Employees Health Benefits Program
Public health plan maintained by a state government
CHAMPUS and TRICARE
Indian Health Service

The Medicare Modernization Act (MMA) requires organizations to inform Medicare-eligible policyholders if their coverage is creditable. The MMA imposes a late enrollment penalty upon individuals who fail to maintain creditable coverage for 63 or more days following their Initial Enrollment Period.

Can an HSA be used for Medicare premiums?

Yes, you can withdraw your accumulated HSA funds to cover Medicare premiums and other qualified medical costs not covered by Medicare. These costs include:

Medicare premiums
Medicare deductibles
Medicare coinsurance and copayments
A portion of long-term care premiums
COBRA health continuation coverage
Healthcare coverage while receiving unemployment compensation

Your HSA funds can also pay for:

Dental care
Hearing care
Vision care
Out-of-pocket expenses for over-the-counter and prescription drugs
Your 20% cost share of most services covered by Medicare Part B

However, this money cannot be used to pay Medigap premiums.

Medicare Part A and HSA

Individuals who have not paid enough Medicare taxes while working might have to pay a premium for their Part A coverage. Fortunately, they can apply HSA funds toward this cost.

What is the 6 month rule when enrolling in Medicare with an HSA?

The 6 month rule for Medicare enrollment with an HSA applies to individuals who sign up for Medicare after age 65. The rule establishes a 6 month “look-back” period during which you receive retroactive Medicare coverage. At this point, you can no longer establish or make contributions to an HSA.

Is it possible to get a penalty for having an HSA on Medicare?

If you already have an HSA when you enroll in Medicare, you can still use HSA funds for medical expenses. Once your Medicare takes effect, you can no longer contribute money to your HSA.

Once you turn 65, you can delay enrollment in Medicare and avoid a late enrollment penalty if you have a health plan with your or your spouse’s employer.

HSA accounts offer substantial tax benefits and financial security for healthcare needs. However, you must be enrolled in a high-deductible health plan (HDHP) and have no other health insurance. To avoid penalties, discontinue contributions at least six months before Medicare enrollment or retirement. Consult your HSA administrator for further guidance.

FAQ

Can you have an HSA if you are covered by Medicare?

You can hold an HSA if you are on Medicare and withdraw funds for approved medical expenses. However, you can no longer add funds to your account. Any money added to your HSA after Medicare enrollment may be subject to a 6% excise tax penalty for each year the over-contributions remain in your account.

When should I stop contributing to HSA before Medicare?

Individuals, employers, and other contributing entities should stop adding to their HSAs six months before Medicare enrollment or retirement. Those who apply for Medicare after age 65 receive six months of retroactive health coverage, which means they can’t make or receive HSA contributions during that time or after without penalty. The HSA administrator can reverse over-contributions made during the six-month lookback period in many cases.

Is a health savings account (HSA) useful?

An HSA can be quite helpful, depending on your financial situation and goals. It can yield tax savings by reducing taxable income with contributions, earning gains tax-free, and allowing tax-free distributions for eligible healthcare expenses. It can help cover medical costs that Medicare doesn’t.